Trinity Medical Center started its “Now” campaign after its move to the U.S. 280… more

As recessionary pressures fuel demand for jobs created by new health care projects – and demand for health care services climbs – the state’s process of approving new hospital projects is under increased scrutiny.

In the Birmingham metro area alone, more than $374 million worth of capital investment for planned health care projects remains stalled in the state’s certificate of need review process, with three new proposals being challenged since last fall.

Trinity Medical Center started its “Now” campaign after its move to the U.S. 280… more

And if Trinity Medical Center’s long-running battle – currently in its 54th month – to relocate from Montclair Road to U.S. 280 is an indication, the beleaguered projects could have months of litigation ahead.

The delays highlight the challenges faced by Alabama’s State Health Planning and Development Agency and the 35 other state-run certificate of need programs nationwide as officials seek to prevent the programs from becoming too cumbersome without sacrificing their power to control the growth of health care.

Legislative changes

While regulations vary by state, certificate of need, or CON, programs in general require health care providers to get approval before building new facilities, increasing a hospital’s capacity and, in some states, purchasing new equipment.

The programs are designed to control health care costs by allowing providers to meet demand without creating more facilities or capacity than the community can support. But they often become battlegrounds where competing providers delay or block projects that would cut into their business.

Since competing providers can appeal health regulators’ rulings into the state court system, the process can drag on for months or years without resolution.

The Alabama Legislature took steps this year to rein in its CON program with legislation that allows providers to bypass the circuit court system and move appeals directly to the Alabama Court of Civil Appeals.

According to the bill’s sponsor, Rep. Mary Sue McClurkin, R-Indian Springs, that should make it more difficult for providers to use the legal process to delay or quash competing projects, saving time and money.

“If the opposition can delay a project for several years, then they have succeeded. They’ll let somebody else do it for several more years and pretty soon they just run out of money,” McClurkin said. “There is no reason for health care dollars to be spent on the legal process like that. That just shouldn’t be part of it.”

But McClurkin’s bill does little to make the state’s CON process less political. After sponsoring the bill several times before, she said the change that allowed it to pass this year was the addition of language that the bill would not apply to any existing CON disputes. That means the legislation comes too late for Jefferson County’s challenged projects.

Meanwhile, CON programs in other states are also facing new challenges this year. A group of doctors filed a federal lawsuit in June against the state of Virginia, seeking to overturn CON review there on the grounds it violates the Commerce Clause of the Constitution by hindering their ability to import medical equipment.

The doctors argue the process stacks the deck in favor of existing health care providers, making it harder for competitors to enter the market. The case could have broad ramifications on other CON states, including Alabama, if they are successful.

“I think even if it doesn’t go all the way to the U.S. Supreme Court, a decision still has implications for the other states that do things like this,” Robert J. McNamara, legal counsel for the Institute for Justice, a Libertarian group assisting on the case, told the Business Journal in June.

The debate

Supporters of the CON process insist it is necessary to control the cost of health care because the market does not work like a regular free market. That’s because patients don’t usually shop around for the best prices as they would other commodities.

“You’re not going to go for the least expensive open-heart procedure like you would new flooring or something like that,” said Alva Lambert, executive director of the State Health Planning and Development Agency. “You want the best there is regardless of the cost and there’s no bargaining on the price, so that in and of itself is different from a traditional free market environment.”

Additionally, Lambert said, government involvement in health care through Medicare and Medicaid and even third-party payers like private health insurance further hinder bargaining, making it necessary to prevent the duplication and excess capacities that drive up costs. And of the states that have attempted to drop their CON programs, about half have gone back to them in some form due to skyrocketing Medicaid expenses, he said.

“They see their Medicaid budgets go out of sight,” he said. “If you had guaranteed reimbursement at no limit, everyone would open anything they could.”

The flip side of that argument is that CON laws are outdated and sometimes lead to increased health care costs by limiting competition.

The programs stem from a 1974 federal law that required CON programs in an attempt to check rising expenses at a time when Medicare reimbursed hospitals for the cost of service instead of giving a standardized rate.

But Medicare ended that practice decades ago. And after the federal government repealed the law in 1987, 14 states responded by eliminating their CON programs entirely.

Critics argue the 36 states that maintain CON programs do so under pressure from providers anxious to maintain the competition-blocking power afforded by a certificate of need.

“The rules in most states are biased to protect hospitals,” said David Williams, founder of Williams Consulting Services LLC, a Michigan health consulting firm. “And so hospitals get these very lucrative franchises and don’t want competition, so that’s why these laws are surviving.”

Williams also said states that maintain CON programs do so to protect the jobs of health regulators and others involved in the CON process and to maintain centralized power over health care.

“The government doesn’t want to give up the power of telling people what to do,” he said. “CON needs to be revised dramatically and some folks argue it should be eliminated.”

Cost impact

Critics also point out there is little evidence that CON programs actually control costs.

According to a 1998 study at Duke University, CON programs are associated with a modest 5 percent reduction in long-term acute care spending per capita but not with a significant reduction in total health care spending. The report also found no evidence of a surge in spending in states where CON regulations were removed.

Additionally, in 2004, the Federal Trade Commission and the Department of Justice claimed in a 361-page report that CON regulations actually contribute to rising prices by limiting competition.

“The agencies believe that, on balance, CON programs are not successful in containing health care costs, and that they pose serious anticompetitive risks that usually outweigh their purported benefits,” the report stated. “Market incumbents can too easily use CON procedures to forestall competitors from entering an incumbent’s market.”

But few recent studies are available for CON reformers to rely upon. The topic has not been a major research area for academics since the ’90s when the first states began dropping their CON programs.

According to Paige Powell, assistant professor of health services administration at the University of Alabama at Birmingham, that’s likely because there’s not a lot of data available since each state now has its own way of reviewing certificates of need, varying in scope and severity.

“Alabama is still one of the strictest certificate of need states that there is,” she said.

The future of Alabama’s CON program remains unclear. McClurkin, who sponsored a failed bill more than a decade ago to disband the state’s CON program, said she feels there is still room for reform in Alabama, but she no longer feels the state can do without the regulation because of the potential impact on Medicare and Medicaid costs.

“But if Medicaid and Medicare were not so much a part of it, then I think the free market could have a better rein,” she said.